Tuesday, February 28, 2017

Analysis of Deere 2016

Business: An American outdoor machine producer. They have eight different product categories: Residential (lawn mowers), Agriculture (tractors etc.), Construction (Trucks and Loaders), Landscaping & Grounds Care (commercial lawn mowers), Golf & Sports (fairway mowers etc.), Forestry (harvesters and dozers), Engines & Drivetrain (diesel engines and generators), Specialized (military and rental). Their largest is however Agriculture and most people in countries conducting modern agriculture will have have seen the beautiful Deere logo.

Active: 30 countries world wide. Focus on US, Canada, Europe, Brazil, Russia, India and China. I was surprised to see that they did not mentioned Africa but maybe the infrastructure need to improve much more before Deere can establish themselves stronger there.

The P/E of Deere is too high for me with 22.6 and the P/B is also awful with 5.3 which giver a very clear no go from Graham. The earnings to sales looks good with 7% and the ROE is also excellent with 23% but the book to debt ratio is scary and looks like a bank. Yes, they do plenty of financing so I know where it comes from but it still looks scary.

In the last five years they have managed to have a yearly negative growth rate of -7% which gives us a motivated P/E of around 8 which means Deere is today highly overvalued by the market.

They spend a massive amount on R&D since it correspond to 91% of their earnings in this case that does however come from them not being able to push out their products as they should do.

They pay a poor dividend in the size of 2.2% which correspond to 50% of their earnings so I doubt they will increase it any further for the time being.

Conclusion: Graham says no to Deere and so do I at this moment. The P/E and P/B is awful and only the ROE is what looks ok but they are massively leveraged with debt on the other hand. My problem right now is that due to strong dollar and a no clue why share price increase as of late I have a fairly nice profit on Deere that I could claim. Berkshire and Mr. Buffett have even walked away. If Deere would have even been close to "normal" earnings and Mr. Market would value Deere at P/E 22 then I would have walked away. Earnings are at the moment pretty much half of what they had in 2012, 2013 and 2014 and for this reason I decide not to sell my shares and I will remain as a shareholder. I will however not buy any more shares at this moment.